Why Distance Broke Business Banking, and How Account Opening Can Fix It

Distance is fracturing the relationship between institutions and businesses because digital banking is not filling the gaps left by the industries’ shifting branch networks.

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During the past decade, the number of banking locations declined across the country by tens of thousands. While online and mobile banking have worked to provide continued access to accountholders, they miss one key element: Most institutions can’t open new business accounts without requiring the business to visit a branch. In fact, only 17% of banks allow small businesses to apply for deposit accounts entirely digitally, according to reporting from The Financial Brand

It’s not a small issue. A business may have no preferred financial institution (PFI) nearby, and yet no institution they would prefer can open a new account remotely. Or, what’s worse, a business may stop considering an institution as their PFI because they must go to a branch to open new accounts. 

What does that translate to? The majority of banking leaders say their fair (32%) or completely broken (40%) account opening process is the single-greatest factor preventing business deposit growth, according to a survey of senior executives at 75 mid-size banks and credit unions conducted by Cornerstone Advisors, nearly half of the institutions were $1 billion to $10 billion in assets. 

With vicinity as a shifting factor, institutions that improve business account opening can serve businesses whose banking relationship is disrupted by distance.

Distance Disrupting PFI

Business banking is more competitive now than it ever has been. Credit unions increasingly serve small and medium businesses. Many fintechs have launched and grown offerings for businesses. With more players working to provide the best experience – add interest rates pressure now as well – competition has reached a crescendo. 

Greater competition has arrived on the scene when bank footprints have receded significantly since the Great Recession, but the process began long before that with states removing the branch-banking laws that kept nationwide banks out of towns served by state-chartered banks. Between 2008 and 2021, banks closed more than 13,000 branches — a 15.3% loss nationally, according to the FDIC’s BankFind Suite. Bank closures and acquisitions have brought the number of bank charters down to 4,237, a decline from nearly 7,100 in 2008. 

Credit unions have seen parallel declines in charters; they now number 4,853, according to the latest available report from National Credit Union Administration. But, their locations did not decline at the same pace as banks; they even grew the number of branches by 126 on net, from 2009 to 2020. More credit union locations, though, do not mean the void left by commercial banks has been filled. Credit unions often have membership limitations and geographic focuses that limit their ability to expand to areas vacated by banks. 

Branch numbers are declining; the industry has known it for a long time. It’s the relationship element of acquisitions and branch changes, though, that offers institutions growth opportunities, while bringing others significant retention risk.

A Relationship Vacuum

It can make business sense to close branches, particularly from an acquirer’s perspective, but local businesses often feel branch closures are only about dollars and cents. M&A almost always creates some customer fallout for an acquiring bank, as it does for an institution that closes a branch. 

Imagine you are a business owner and a larger institution acquires your bank.  The local branch is closed, and people in town are laid off. How would that affect your decisions when your business needs insurance, a line of credit, or a commercial loan? What if you are a main street business needing a deposit account and payment processing? Would you now drive to another city to open more accounts?  

It’s easy to lose PFI status as an acquirer, or as an institution that closes a branch, but more important is the opportunity to gain PFI status with disgruntled businesses. It’s reasonable to conclude that a business owner affected by branch changes would consider another institution – even if it did not have a location nearby – if they could do so conveniently. Survey data supports the same conclusion.

Demand For Convenient Account Opening

About 75% of small- to medium-sized businesses (SMBs) want digital deposit account opening, as do nearly two-thirds of moderate-complexity SMBs, according to Cornerstone Advisors. The demand was the same for both current and prospective business account holders.  

Low-complexity SMBs are startups and sole proprietorships with less than $1 million in revenue. Moderate-complexity SMBs are more mature businesses with a partnership structure and revenue between $1 million and $25 million. The study also defined high-complexity SMBs as LLCs or corporate entities that need letters of credit, sweeps, and Electronic Data Interchange (EDI), and that have between $25 million and $100 million in revenue.

Despite high demand, the account opening experience is still a challenge, according to banking leaders’ self-assessment. For 80% of institutions, the speed of account opening is a pain point creating cost and inefficiency – for the bank and the potential business customer. Outdated back-office processes are a similar pain for 72% of institutions. Another 65% describe compliance – rules like Know Your Customer and Anti-Money Laundering – as costly and inefficient.

How to Fix It

We’ve covered how distance creates opportunities to win over new business account holders, and we’ve shown that they want digital account opening. But how can institutions take a process that’s fairly or completely broken and fix it? 

Cornerstone Advisors’ Research Director Ron Shevlin, and Senior Director Chris Miller, have a complete guide, “The small business digital account opening imperative,” that can take you through the process step by step.

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